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Intel feeds off spoils as Texas Instruments and Qualcomm do battle over 3G chips
September 11, 2005

http://www.busrep.co.za/index.php?fArticleId=2871827

New York - Christophe Jouin won't take his staff for a working lunch to any restaurant near his suburban San Diego office. His enemies could be sitting at the next table.

Jouin is the ranking manager at the 200-person West Coast outpost of Dallas-based Texas Instruments. The firm's semiconductors run more than half of the world's cellphones. His closest rival, Qualcomm, has headquarters around the corner.

The battle between the two biggest makers of cellphone chips is intensifying as phone sellers and service providers roll out the next generation of handsets, and try to persuade consumers to cough up more than $200 (R1 250) for them.

In the works for almost a decade, third generation (3G) phones use double or triple the number of chips found in current models, providing a potential bonanza for semiconductor firms. Getting the phones right may translate to a $40 billion market by 2009, Boston-based Yankee Group Research predicts.

Investors are betting Texas Instruments can parlay its lead in so-called 2G and 2.5G models to dominate the new market. The company gets over $1 billion in annual chip sales, about 10 percent of its revenue, from Nokia, the world's biggest handset maker.

Texas Instruments' shares have surged 32 percent this year, while Qualcomm's have fallen 5.7 percent after outpacing its rival in 2004. This year Qualcomm has twice slashed its forecast for shipments of the main type of 3G phones, WCDMA, and now predicts manufacturers will ship 45 million of the phones globally this year, down from a January forecast of 55 million.

Qualcomm chief executive Paul Jacobs has said he wants to control half of the market. Yet he hasn't managed to wrap up deals for 3G chips with either Nokia or second-biggest phone maker Motorola, says Cody Acree, an analyst at Legg Mason Wood Walker.

Both Texas Instruments and Qualcomm may stall as they wait for customers to determine the magic combination of bells and whistles that will entice them to trade up to 3G models. Earlier this year, Nokia tracked what customers did with their 3G phones. The callers used an average of 15 separate applications a week and downloaded five new programs a month, but no feature emerged as a clear favourite.

A killer application may surprise even seasoned observers. Motorola and others failed to predict the popularity of built-in cameras in 2003. And users unexpectedly embraced ring tones, downloading $217 million worth last year in the US, Jupiter research says.

US carriers are wary of rushing into 3G after their European counterparts got burned, paying about $100 billion for fast-data licences. Instead of ushering in a new telephone age, the spending by the UK's Vodafone Group, Germany's Deutsche Telekom and Telecom Italia Mobile peaked as the internet bubble burst in 2000.

Vodafone and others delayed services such as video calls, sending shares plunging.

This time around, companies are asking when, not if, 3G will take off. Customers have got used to camera phones and games, and doing anything more requires faster speeds.

With 3G, Texas Instruments and Qualcomm are colliding like never before, as they compete to deliver the exact same type of chip for the same phone type. The two sued each other in 2003 over a patent-sharing agreement struck in 2000. Qualcomm alleged that Texas Instruments violated the terms by disclosing that it didn't have to pay royalties on some Qualcomm patents.

Texas Instruments won that case in the Delaware supreme court in June.

Now chief executive Rich Templeton is counting on 3G chips for an increasing percentage of revenue just as Qualcomm is going after his semiconductor customers.

Research firm IDC says that by 2009, WCDMA chips will run 26 percent of the 932 million handsets sold globally compared with 3.2 percent of last year's 692 million. In 2004, Texas Instruments had 31 percent of the WCDMA chip market versus Qualcomm's 28 percent.

Last year, Texas Instruments' 3G products delivered about $600 million in sales, roughly 15 percent of the revenue from cellphone-based chips. During the first half of this year, it boosted that proportion to 20 percent.

Qualcomm's chip division generated $3.09 billion in sales during fiscal 2004, or 63 percent of total revenue.

Intel, the biggest chip maker, may emerge as the spoiler in the 3G wars. The California-based firm is jumping into cellphone chips as growth slows in its main market, personal computer (PC) semiconductors, in which it has an 80 percent market share.

To counter the drop-off, Intel is pushing a new 3G processor called Hermon, which puts the communications capabilities and the software that runs a cellphone's video, sound or games on a single chip. Chief executive Paul Otellini says Intel has an advantage because it has decades of experience with chips that run software on PCs.

Intel promises that customers will soon announce that they'll use Hermon.

Templeton has weathered his share of corporate upheaval. In the 1990s, he led Texas Instruments as it pared its defence and consumer electronics businesses and made semiconductors its primary focus. He bet on a digital signal processing chip that has become the main engine of cellphones. He helped persuade Nokia to build phones that used the new chip as the Finnish company moved to digital technology.

After striking the deal that made Nokia the biggest customer of Texas Instruments, the company sold, or closed, a dozen consumer and defence units, betting that none would deliver the return of the chips.

Cellphone chips now account for about 25 percent of Texas Instruments' total revenue.

For the 3G hopefuls to win in the new market, they'll have to persuade investors that this time around 3G is coming, even though it's not yet the prevailing standard outside South Korea and Japan. - Bloomberg